Anhui medicine wrong for
China By Benjamin A Shobert
Few issues in China better illustrate the
poverty in which most Chinese live than their
inadequate access to modern healthcare. These
problems shed light on growing tensions between
the urban and rural populations as well as the
health implications to China's high-velocity
encounter with modernity.
Throughout
Beijing's 12th Five-Year Plan are numerous
acknowledgements in the forms of incentives and
relaxed standards on foreign investment all
designed to bring outside
expertise into the healthcare
market while encouraging the development of
domestic capabilities in these areas.
Towards the end of 2011, JPMorgan
published a report that identified a plan of the
Chinese government to build thousands of hospitals
and upgrade many more. As most industry experts
agree, even if China is successful with this
massive build-out, it still will not be enough to
meet the country's exploding healthcare demand.
Beyond the need for physical
infrastructure and the equipment to finish out
these newly built facilities loom even larger
questions, how will the government pay for the
healthcare needs of its people? For a very poor
country with a centralized healthcare scheme,
meeting even baseline needs will itself be
expensive, let alone the much greater expenses
anticipated as Chinese come to understand that
certain types of cardiovascular conditions,
communicable diseases and cancers are treatable by
modern medicine.
An equally problematic
question is how China will provide the human
capital necessary to deliver healthcare around the
country. In a country where the government
estimates it needs some 200,000 pediatricians in
this specialty alone, a shortage in skilled
medical workers remains a major problem.
In the past year, doctors in China who
have become frustrated at their pay have been
leaving their hospital practices to join
pharmaceutical companies as sales representatives,
a move that likely played a small role in
Beijing's 2011 decision to allow doctors to begin
practicing one day a week at private hospitals
where they can make more money.
Beyond the
challenges of expanding China's healthcare
infrastructure and the human resources it will
require is the question of how the country can
afford to offer basic pharmaceuticals if it is
successful in adding to the number of doctors
within the system at the same time Chinese come to
understand the various maladies made treatable by
modern drugs.
Making Beijing's national
policy towards pharmaceuticals even more
complicated, is that for years the central
government has allowed doctors and hospitals to
generate (40-50%) of their revenues and a
significant percentage of their operating profit
by marking up drugs prescribed by the physician
and dispensed by the hospital.
The
over-arching need from Beijing to improve the
quality and effectiveness of healthcare runs at
perverse cross-purposes with its need to
incentivize doctors in ways that do not add to the
central government's crippling healthcare
expenditures and lead to over use of such drugs as
antibiotics.
As Beijing's early attempts
at healthcare reform have advanced, it has become
increasingly obvious that pharmaceuticals remained
an area where prescription and pricing abuse were
all too common. The country badly needed a
pharmaceutical policy that centralized purchasing
power, thereby reducing costs, while addressing
the over-and-under prescription of drugs made
common by Chinese hospitals that saw drug
disbursement as an important profit center.
In an attempt to address these competing
priorities, the central government allowed the
province of Anhui to pursue its own model for
controlling the costs of pharmaceuticals
distributed by the state's healthcare system.
Unlike the Shanghai model, rolled out in early
2011, the Anhui model is fixated on getting the
lowest cost possible without - at least as critics
suggest - adequate consideration of the
relationship between price, benefit and quality.
The Shanghai model attempts more of a
balance in this regard, and in particular pays
more attention to matters of quality, but thus far
it has not received the attention that the Anhui
model has. As of today, 18 of China's 23 provinces
have adopted all or part of the Anhui model, a
trend that has many multi-national pharmaceutical
companies worried.
The Anhui model broadly
consists of two elements: first, a requirement
that prescribing institutions have a 0% mark-up on
drugs called out on the Essential Drug List (EDL)
and second, a formalized and centrally controlled
bid and purchase process for drugs on the EDL.
George Baeder, a Shanghai-based Partner at
Monitor Group Asia, is an expert on the Chinese
pharmaceutical market. Baeder emphasized that not
all parts of the Anhui model have been equally
adopted by every province.
"In the
industry, people generally are referring to the
two-envelope bids instituted in provincial tenders
for EDL drugs in Anhui, which has spread to more
than a dozen other provinces and to non-EDL
drugs." He went on to state that, "The problems
created by zero mark ups can also exist in
provinces that do not have a two-envelope bidding
system."
The two-envelope bidding system
is designed to establish two gates that a
successful bid must go through: the first envelope
supposedly ensures that the companies bidding on a
given drug on the EDL have the technical
capabilities and quality control protocols in
place and the second envelope is entirely focused
on price.
Unlike some, Baeder does not
believe the two-envelope process is inherently
flawed; rather, the problem revolves around how
the product set included in the tender is defined
and how thoroughly the first envelope is
evaluated. As designed, the first envelope should
constitute a gate that, as he says, "Disqualifies
products that are low quality, cannot be delivered
in sufficient volume, or in a timely matter."
But, what Baeder and others see happening
is that this first envelope is given only a
cursory review that rarely disqualifies any vendor
from bidding during the second stage.
Consequently, "few of the bidders are disqualified
on technical grounds and therefore there is a big
incentive to compete solely on price by dropping
quality standards."
As designed, the Anhui
centralized bid and tender model would have
consolidated volume, allowing manufacturers to bid
at lower prices but make up with increased
quantity what they were losing on individual gross
margin. While the Anhui model has been successful
driving costs down, it has been equally successful
rewarding business to less-scrupulous drug
manufacturers that have cut corners and dropped
quality standards in order to try to make money.
"Since both patients and physicians are
keenly aware of this deterioration, many now
distrust EDL medicines and prefer to pay a premium
for brands that they recognize," says Baeder.
Michael Zakkour, a principal at Technomic
Asia, a China-based consulting firm, has worked
extensively in China's pharmaceutical space. He
notes that, "The results are already in. The share
prices of domestic drug companies in China are
down an average of 25-30% and the share prices of
foreign pharma companies with interests in China
are down."
As Zakkour said, "[the Anhui
model] will impact profits along the entire supply
chain, from manufacture, to distributor, to
retail."
Not only has the Anhui model
forced certain drugmakers to the sidelines while
others have chased a downward spiraling price,
Baeder notes that "Some EDL drugs have disappeared
from tenders because tender prices have been below
cost and either no one bids or the winning bidder
cannot supply at the promised price."
In
addition, because the Anhui model seeks to control
costs not only by lowering reimbursement prices
paid for drugs but also by requiring a 0% mark-up
by the local hospitals and healthcare clinics, in
some cases the products are never locally stocked.
Baeder said that in many cases, "The clinic cannot
afford to stock products on which it cannot make
money; distributors don't want to carry them
because they cannot make money … and doctors won't
prescribe them because they either do not trust
the products or cannot make money on them (or
both)."
Obviously, multinationals have
many reasons to be wary of the Anhui model. Thus
far, according to Baeder, multinationals have not
been hurt as much as domestic drug producers have.
This is because, according to him, "the
[multinationals] have fewer drugs in the EDL. Most
still have 60-70% of their revenues from branded
generics, most of which are reimbursed, but not
included in the EDL."
Baeder said the
Anhui model's emphasis on a two-envelope bidding
process was beginning to spread beyond the EDL
into non-EDL pharmaceuticals, a move that could
ultimately accelerate price-gouging pressures and
hurt American and European drug companies.
Zakkour noted that not only does the Anhui
model set in motion the pricing pressures Baeder
referenced at the provincial level; it also
muddies the water nationally. Because the Anhui
model forces a province-wide set price and rewards
all of the business to one manufacturer, Zakkour
says ultimately this means "US and EU pharma
companies compete on price, against generics, thus
eliminating their most important differentiator
and profit center."
The net is that while
the Anhui model has been successful driving cost
out of the system, it has done so in a way that
has discouraged larger more sophisticated
pharmaceutical companies from viewing China as a
growth opportunity. Yes, the potential volume in a
largely un-tapped market is enormous, but so too
are the pricing risks if the central government
does not put in place a more balanced plan for
dealing with increased costs due to expanded
coverage.
While both domestic and
multinationals in the pharmaceutical sector grow
increasingly fearful that the Anhui model will
further expand, they remain hopeful problems with
the model will be noted and changes will be made
allowing for more flexibility. The 2011 promotion
of Sun Zhigang from his status as vice governor of
Anhui province to be the director of the Office of
Health Reform suggests the Anhui model is likely
to be the template for further healthcare reforms
in China over the short-term.
This
troubles more than just pharmaceutical companies.
Medical device and diagnostic companies that
desperately want into the growing Chinese market
are equally concerned. They realize how quickly
the Anhui model could be deployed towards their
products with similarly disastrous results.
The Anhui model has, at its core, the best
of intentions: lowering costs, streamlining
purchasing processes, and expanding coverage of
life saving pharmaceuticals to more Chinese.
However, in its current form, the Anhui model
provides many disincentives to both domestic and
multinational pharmaceutical companies that
desperately need the Chinese market to continue
opening and extending coverage to many urban and
rural Chinese only now beginning to understand the
great good modern medicine has in store for them.
Benjamin A. Shobert is the Managing
Director of Rubicon Strategy Group, a consulting
firm specialized in strategy analysis for
companies looking to enter emerging economies. He
is the author of the upcoming book Blame China
and can be followed atwww.CrossTheRubiconBlog.com.
(Copyright 2012 Asia Times Online
(Holdings) Ltd. All rights reserved. Please
contact us about sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
